Authors: Matthew P. Drennan
Date: July 23, 2011
Project: The Economic Consequences of Rising Income Inequality
What does the long rise of income inequality in the United States have to do with the Great Recession? The hypothesis of this paper is that there were two effects – one major and one minor. The major effect was that increasing consumer indebtedness, which supported consumption until the crash in 2008-09, was driven by the pressure to maintain consumption in the face of stagnant income for most households. That debt-supported expansion of consumption became unsustainable after 2007. As consumers have begun to reduce their debt and increase their saving, consumption will be depressed for some years, producing an anemic recovery.Consumer debt would have been much lower if income inequality had not increased so much,and the overhang of debt will weaken consumption growth for some years. The minor effect was that consumption during the Great Recession was somewhat less, and declined somewhat more,than it would have had income inequality not increased.
Link to Publication